Low-income earners in Vietnam will bear the brunt of VAT increase: VCCI

By Anh Minh   October 9, 2017 | 09:00 am PT
Low-income earners in Vietnam will bear the brunt of VAT increase: VCCI
Workers at a footwear factory in Hanoi. Photo by Reuters/Kham
The tax increase will enlarge the rich-poor divide and do more harm than good to society and the economy, the group says.

The Vietnam Chamber of Commerce and Industry (VCCI) has asked the Ministry of Finance to reconsider its decision to raise value added tax (VAT), adding yet another voice to widespread public opposition against the move.

In a recent letter to the ministry, the VCCI said that higher VAT rates will hit low-income earners the hardest.

Essential products cost just the same for low-income and high-income earners. Therefore, when VAT is raised, the burden is heavier on low-income earners as they have less ability to pay.

"Regarding the social impact, higher VAT will enlarge the rich-poor divide and lead to unpleasant repercussions for society,” it argued.

In addition, raising VAT will decrease consumption demand, which could affect economic growth.

If VAT rises, the private sector will suffer because foreign direct investment (FDI) companies mostly focus on making products for export that are VAT exempt, while state-owned enterprises (SOEs) can benefit as they collect taxes from non-core businesses.

This is bad news for Vietnam’s job market as private firms create more jobs than FDI firms and SOEs, especially when Vietnam has around one million people entering the workforce each year.

Two months ago, the finance ministry announced that it was planning to increase a number of different taxes and fees, including raising VAT from 10 percent to 12 percent.

It insists that raising indirect taxes such as VAT is essential and an international norm. The higher taxes are designed to make up for an inevitable shortfall that will occur when Vietnam fulfils its commitments to free trade agreements and removes import tariffs, and will also help tackle rising public debt, the ministry said.

But last month, the Vietnamese government instructed the ministry to put on hold a series of proposed tax hikes to make life easier for local businesses and make this year's growth target more achievable.

The government said in order for the country to reach its economic growth target of 6.7 percent this year, a goal that some experts say is unrealistic, taxes should remain unchanged for now.

But on the other hand, Sebastian Eckhardt, the World Bank's lead economist for Vietnam, argues that in Vietnam, low VAT rates benefit the rich more than the poor, saying that keeping a low VAT rate is not necessarily the best way to address fiscal equity and fairness.

Eckhardt said the finance ministry's decision to raise VAT is important to ensuring sustainable growth and macroeconomic stability as Vietnam’s tax-to-GDP ratio has fallen over recent years, from 23.5 percent of GDP in 2010 to 19.1 percent of GDP in 2015.

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